Renting Vs. Buying

Many people have asked me: what’s more cost effective: renting or buying? Now, that always depends on your personal situation but here are the two fundamental elements you need in order to buy.

1. Down payment: most mortgage lenders are beginning to require that buyers have at least 20% of the purchase price to put down as cash at closing.

2. Staying put: the value of real estate appreciates throughout the years. The rule of thumb is that the value of your home will double in 10-15 years. However if you’re not planning to stay that long, renting is not your only option, you should plan to live for a minimum of 3-5 years to get the full benefits of living in a primary residence. So if you have the down payment and are ready to live for 3 years in one place, then here’s why its better to buy: To keep it simple, let’s say you could either rent for $2,000 or have monthly payments on a home (condo fees, taxes & mortgage payment) for $2,000. At the end of three years, your total cost to live would be $72,000 for both scenarios. However, if you dig a little deeper you will see that a homeowner can take advantage of several tax exemptions/deductibles that renters cannot:

A. Mortgage Interest: The mortgage interest on your loan is tax deductible and can significantly reduce your taxable income, putting you into a lower tax bracket.

C. Forgiveness of Debt Tax: Often, when a lender forgives repayment of a borrower, the principal and interest are considered ordinary, taxable income (in the eyes of the IRS, of course).

The new law allows certain taxpayers to eliminate discharged debt from their taxes, if and only if, the lender forgave the debt in 2009.The amount of debt that can be excluded is limited to $2 million and the exclusion is only available for loans used to buy, build or significantly improve a primary residence. Vacation homes, investment properties and other secondary homes do not qualify.

3. Mortgage Insurance: The relief act also extends federal tax relief for qualified homeowners who pay mortgage insurance. Qualified borrowers can deduct the full amount of their private or government mortgage insurance if the families have an adjusted gross income of $100,000 or less. Families with incomes up to $109,000 are eligible for a partial deduction. This bill has been extended into 2010.

4. Energy Tax Credits: Another relatively new tax break is possible via the Energy Policy Act of 2005. Tax credits of up to $500 are available for upgrading heating and air conditioning systems, insulation, windows, doors and thermostats, caulking, installing metal roofs and reducing energy waste. Qualified solar energy and fuel cell systems can net tax credits up to $2,000. For more details regarding this credit, please visit this link:

http://www.energystar.gov/index.cfm?c=products.pr_tax_credits

5. Home Improvement Loan Interest: The interest on a home improvement loan is also deductible, but it is calculated differently. You can deduct all the interest on a home improvement loan, provided the work is a “capital improvement” rather than repairs, or maintenance. Capital improvements typically increase your home’s value (say you added a bathroom), prolong the life of the home (new systems) or adapt it to new uses (improvements to assist senior citizens or people with disabilities). You can get tax benefits from repair work (painting, repairing, etc.), but only when you sell your home. However, you could use a home equity loan to make repairs and deduct the interest.

PLEASE NOTE: This deduction is extremely tricky and should be advised by a tax professional. Please read this article for further information: http://www.bankrate.com/brm/news/loan/19990203.asp

6. Points: Each point on your loan equals 1 percent of the principal amount. Refinanced mortgage points are deductible as well, but only when they are amortized over the life of the loan. If you refinance a second time, the balance of the old points from your refinanced loan offer an immediate write off. For a more in depth look at points: what they are and how you can write them off on your taxes, please follow this link:

http://homebuying.about.com/od/marketfactstrends/qt/TaxDedPoints.htm

7. Capital Gains Exclusion: The Taxpayer Relief Act of 1997 allows jointly filed married taxpayers to keep, tax free, up to $500,000 in profit on the sale of a home (it must have been used as a principal home for two of the prior five years). The amount is halved for those filing single or separately. The exclusion is available as often as you qualify (one home every two years) on an unlimited number of homes.

8. $8,000 Tax Credit: The Federal Government has put in place an incentive for homebuyers. A tax credit of up to $8,000 is available for qualified first-time homebuyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009. You can get more details on this qualification via this link: http://www.federalhousingtaxcredit.com/2009/index.html

9. Boston’s Residential Tax Exemption: If you purchase a primary residence in Boston, you can apply for the residential tax exemption on the 1st of each year. It will save the average home-owning tax payer around $1,500/yr. For more information on this exemption, please follow this link: http://www.cityofboston.gov/assessing/resexempt.asp

It’s fairly clear why people choose to buy versus rent. If you rent for 3 years at $2,000 a month, $72,000 of your money is thrown away. You cannot claim tax deductions on that money, nor do you have an asset to sell once you are done living in it. When you purchase a home your still paying $72,000, however, your taxable income is significantly reduced, your residential exemption alone will reduce your monthly payments by $125/month, so therefore you are paying less, from the start. Most importantly, you are not throwing away your money; instead you are holding it in a safe and steady form. Markets have upturns and downturns, but just like any money market, there will be an upward trend in terms of appreciation if you hold onto the asset for long enough. It’s better to hold your money and watch it grow than to hand it over to a landlord. Hands down, purchasing real estate is the way to go.

If you are considering purchasing real estate, but do not have the money for a down payment, you may want to look into a rent-to-own option. Feel free to contact me or any of my colleagues for more information on this option.